Recovery May Require Holding Stocks Level in February and March

Prices have dropped back as new supplies are appearing, but we still have nearly a month of winter ahead of us. Stocks cannot drop much farther. February 4 stock levels were just above the lowest month-end levels ever seen for PADD 1, which occurred in April 1996.

For stocks to recover to the low end of the normal range, they would have to stay level in February in March, when normally they would be used to meet demand. Keeping stocks level would require finding supply to substitute for the average stock drops of 290 thousand barrels per day (8 million barrels) in February and 210 thousand barrels per day (6 million barrels) in March.

If all of that supply were to come from imports, we would have to see distillate imports into PADD 1 double from their average levels of 7 million barrels in February and March to reach over 15 million barrels in February and 13 million barrels in March.

Alternatively, if U.S. supply alone were to make up the difference, production and movements of products from other PADDs into PADD 1 could increase about 20%-25% over levels seen in February and March for the last several years.

Regardless, stocks are likely to remain low for the rest of the winter, and we could see more price volatility before the warm weather of spring. Also keep in mind that even when the current price spike is fully resolved, high crude oil prices will keep heating oil prices much higher than they were last year. Even before the price spike, retail prices of heating oil were high ($1.21 January 17) because of increases in the price of crude oil -- about 33 cents higher than prices the same time last year.